UK post-Brexit risks analysis – summary – April 2021
- On 24 December 2020, the UK and EU announced that a free trade deal had been reached after many months of negotiations and delays
- The “EU-UK Trade and Co-operation Agreement” (TCA) contains almost no clarity for any topics relevant to UK financial services
- The UK and EU confirmed that no clarity would be available until at least the end of March 2021 after the next set of negotiations between the UK and EU
In April 2021, what do we know now?
- This summary seeks to summarise some of the key points about what is known and what remains unknown; further changes are inevitable and needed
- All of these risks need to be analysed for their potential impact and then suitably mitigated. Plan for the worst case and develop contingency plans. Strengthen all aspects of resilience for your business activities.
- Many regulatory changes impacting UK financial services activities started from 1 January 2021. Some changes are immediate; others contain transition periods.
Broad perspective for post-Brexit risk environment
With the loss of all passporting rights, all future business in the EU requires UK firms to negotiate rules and permissions in every EU state, individually or together if possible.
Under the terms of the TCA, the UK and the EU committed to agreeing a Memorandum of Understanding (MoU) relating to financial services regulation by 31 March 2021.
MoU agreement at the end of March 2021
On 26 March 2021, the UK and EU both confirmed that “technical negotiations” had been concluded for the text of the UK–EU Memorandum of Understanding (MoU). The principles of this MoU were agreed in a Joint Declaration on Financial Services Regulatory Co-operation alongside the Trade and Cooperation Agreement (TCA).
The MoU, once signed, will create the framework for voluntary regulatory co-operation in financial services between the UK and the EU. The MoU will establish the Joint UK-EU Financial Regulatory Forum as a platform to facilitate dialogue on financial services issues.
- In the words of HM Treasury in a 26 March statement, “formal steps need to be undertaken on both sides before the Memorandum of Understanding (MoU) can be signed but it is expected that this can be done expeditiously”.
- “The MoU will establish the Joint UK-EU Financial Regulatory Forum, which will serve as a platform to facilitate dialogue on financial services issues,” a spokesperson for the European Commission said. “On the EU side, the MoU will take the form of a Union non-binding instrument, which requires endorsement by the Council.”
MoU and equivalence decisions
The MoU is separate from any eventual decisions on equivalence, a series of unilateral rulings that each side can make and which will offer market access to financial services.
While the MoU process is entirely separate to equivalence, some EU officials have said that securing a common framework around certain financial services rules could help unlock some limited equivalence decisions allowing UK firms access to the wider EU market.
An earlier draft of the MoU agreement suggested that the UK Chancellor of the Exchequer and the European Commission’s top financial services official should meet twice a year to discuss regulation. It also suggested that the forum’s activities should include:
- Informal consultations on decisions to adopt, suspend or withdraw equivalence
- Keeping the two sides informed on supervision and enforcement of rules
- Sharing information and analysis about the financial industry, including on taxation and efforts to fight money laundering.
The trade agreement signed by the two sides in December 2020 largely sidelined the finance industry. The EU has said since that it is in no rush to grant “equivalence” findings to restore British firms’ trading rights because it is concerned that the UK is moving away from EU standards, taking it further away from “equivalent” status.
Continuing uncertainties remain for now
Since Brexit took effect at the beginning of 2021, London-based financial firms have been largely unable to operate in the bloc, forcing many firms to move billions of dollars in assets and thousands of staff to the continent.
Lenders are being asked by the Bank of England to secure its approval before shifting jobs and business out of Britain into the European Union. The move signals a hardening of its stance over Brexit under Andrew Bailey, who became its governor a year ago.
Bailey has recently taken a tougher line with Brussels over its treatment of the UK financial services sector and, in February 2021, accused the EU of double standards.
Concerns for clarity, business opportunities and resilience
According to the Financial Times, the Bank is concerned about the impact on the resilience of firms’ operations that remain in London if more jobs and operations move to the EU to satisfy the demands of European regulators.
Finance chiefs have also expressed their concerns about the lack of clarity of a post-Brexit financial services deal which includes equivalence. Nevertheless, many firms still have possibilities to invest in new services and buildings within the City of London as part of business developments as they adjust to a post-Covid and post-Brexit environment.
For now, London also dominates the world’s £4.7 trillion-a-day foreign exchange market; it is the biggest centre for international banking and the second-largest fintech hub globally after the United States.
New rules and regulations – passporting and equivalence
- The UK is going to be negotiating with the EU for years to come on a more or less constant basis. Resolving disputes as they arise will be a persistent focus as well as a likely cause of tension. Arbitration systems will probably be tested to the limit.
- “Equivalence” is an EU system that gives single market access to financial firms in “third countries” such as the UK if their home rules are considered by Brussels to be “equivalent” to, or as robust as, regulation in the EU bloc.
- The EU’s caution in granting equivalence partly reflects its desire to learn more about the UK’s plans for any possible divergence from EU regulation after Brexit.
- Although the UK has granted a package of equivalence decisions to the EEA states, providing EEA firms with greater certainty to continue their activities in the UK after 1 January 2021, the EU has so far granted equivalence in only two areas that it regards as essential to global financial stability: (1) for 18 months to clearing houses and (2) for six months to central depositories.
- With the end of passporting on 31 December 2020, in order to access the EU single market, UK based financial services firms must now either (1) comply with the regulatory requirements for market access set at the level of individual member states or (2) rely on equivalence decisions.
- Neither of these two approaches is a like-for-like replacement for the common EU-wide market access that the UK had enjoyed through passporting. Seeking permissions on a state-by-state basis will add complexity and costs for UK financial services firms.
- Law firm Macfarlanes stated recently that equivalence will not give the UK the same level of access to the EU single market it enjoyed as a member state and that there are 59 possible equivalence decisions, all needing administrative processes.
- Relying on equivalence brings changes in UK-EU financial services as it does not cover the same range of financial activities as passporting. Retail banking services including lending, payments and deposit-taking are not included, for example.
- If it grants any equivalence in the future, the EU has said it will watch closely for any divergence from its own regulatory regime.
- The EU is entitled to withdraw any equivalence decision unilaterally at any time with 30 days’ notice. It has previously exercised that right with other countries (for example, against Switzerland in 2014). This permanent risk of changes creates further uncertainty and unpredictability for UK financial services firms.
- All UK firms will need to analyse possible changes in detailed business strategies in response to these regulatory changes and EU-linked restrictions. At the same time, UK firms must consider specific risks including the end of prior business activities and the impact on their business models for accessing EU-based business activities.
- All firms must now work closely with individual EU countries’ financial regulators so there may be many business rule variations to consider between EU countries.
- Firms need to analyse possible solutions such as creating full EU-based business operations to replace UK operations, detailed planning for EU-compliant employee hiring or deployment and identifying UK employees who can no longer work in EU-based roles requiring professional qualifications.
- As firms begin to operate without equivalence decisions by, for example, moving their assets, activities or employees out of London to other European financial centres, so the potential for these actions to be reversed quickly reduces even if eventually an equivalence determination is made.
UK professional qualifications for UK individuals
- From 1 January 2021, and until further clarification is provided by the EU, UK professional qualifications are no longer recognised in the EU. British qualifications are no longer accepted across Europe in accounting, tax, auditing and other areas so this will make it harder for British citizens to work in the EU.
- This will affect a range of professions including lawyers, bankers, accountants and investment management so that those wishing to practice their trade in the EU after 31 December 2020 may need to requalify somewhere in the EU.
- Rules on whether UK qualifications will be recognised and who is eligible to hold certain professional roles vary between EU member states; many member states, including Belgium and Luxembourg, allow only EU citizens to qualify.
- For now, the TCA has created a framework that encourages further conversations on mutual recognition of professional qualifications so, to begin with, the UK government and UK qualification bodies can seek to strike deals with individual European governments and qualification bodies.
- Even if professional qualifications are eventually approved on an individual country basis, general EU travel rules have changed too. Since 1 January 2021, Britons are limited to up to 90 days’ travel within a six-month period without a visa for any reason including work-related activities.
- By contrast, EU citizens face few restrictions on moving to another state for work or leisure and can cross borders freely; UK citizens have now lost those rights to conduct work freely across the EU using professional qualifications.
- Generally, delivering any service within the EU – such as auditing accounts or working as a lawyer as well as all other professions – will require a work visa and in many regulated sectors also being registered in that country as a local professional.
- Visa policy is largely a matter for national EU governments, each of which has its own criteria for skills, language requirements and fees that vary depending on the needs of each country’s labour market.
Trade and transaction reporting
- The UK’s transaction reporting regime (TPR) under MiFID II will change because of Brexit, including connected obligations such as submitting financial reference data.
- This includes the need for trading venues to report for transactions on their venues by their EEA members, and EEA firms in the TPR who operate through a UK branch to start transaction reporting to the FCA.
Capital adequacy and prudential reporting
- In December 2020, the FCA published its first of three detailed Consultation Papers about the planned new UK Investment Firm Prudential Regime (IFPR) for FCA prudentially-regulated investment firms.
- The FCA currently plans to issue three consultations – two more during 2021 as well as its December 2020 consultation – before introducing the new UK prudential regime in January 2022.
- Many UK firms have already started their internal regulatory change projects to prepare for the EU’s similar new prudential regime that no longer covers UK firms. That extensive internal project work for readiness must now be refocused.
- Detailed requirements for new reporting will be announced gradually during 2021 and must be followed by all firms.
Continued supply of UK-based financial services to EEA-resident customers
- Since 1 January 2021, all UK firms that previously conducted retail business in the EEA countries have been unable to do so. Firms can no longer support any EU-resident customers from their UK offices and operations.
- Retail banking services including lending, payments and deposit-taking will not be included in any equivalence decisions that may be taken by the EU.
- The EU has for now dismissed any reciprocal temporary permissions regime with the UK for such services. Instead, the UK has become a “third country” with far greater restrictions upon all its EU-focused financial services activities.
- UK firms need to understand all relevant EU local regulations and take legal advice.
- There may be significant disruption to business activities and related adverse publicity if retail customers or corporate customers are disadvantaged.
- Firms need to consider alternate operational practices and potential for revenue losses due to business activities being illegal in their previous (pre-2021) formats.
Data protection and data transfer
- Data protection is very important for business activities. All firms must think about where data are processed and stored. The UK has confirmed the acceptability of firms transferring data to the EU but there has so far been no reciprocal confirmation that the UK would be “adequate” for data transfers from the EU.
- If the EU does not grant data adequacy to the UK, companies that want to transfer data from the EU to the UK may not have a legal basis on which to do so. This will affect many thousands of companies.
- Until such equivalence is granted, firms need to put in place alternative arrangements to comply with GDPR and the UK Data Protection Act (DPA) to ensure a high standard of protection for individuals’ personal data.
- The TCA states that data flows will continue as normal for (possibly) four to six months from 1 January 2021 and then the EU will make a “data adequacy” ruling. This implies that uncertainty may continue until at least June 2021, impacting all cross-border transfers and uses of electronic data.
- Uncertainties remain until all related rulings including detailed requirements are made by the EU and the UK. The continuing absence of an adequacy decision would mean that it would become more difficult to store the data of private EU citizens on UK-based servers.
- There is a similar concern over the handling of data. It had been hoped that the EU would take an early decision to approve the adequacy of British data protection but it has not yet done so.
- Some important pressure groups within the EU remain dubious about Anglo-Saxon commitment to data privacy and the EU has previously criticised British and American protection of personal data.
Timeline with relevant dates to be logged on regulatory calendar
- The MoU should be signed by 31 July 2021 so there will be more clarity afterwards and more actions for all firms to take in response to detailed aspects
All firms need to immediately continue their detailed planning and research for all impacts on their business activities, employees, stakeholders and clients.
If anyone has specific questions or needs any advice, contact our specialists.